Lenders' Insatiable Appetite for Commercial Real Estate
RECORD-HIGH BORROWING AGAINST INCOME IN Q1 2013
» BORROWERS RAISE $11.26 IN DEBT FOR EVERY DOLLAR IN PROPERTY INCOME
» UNDERWRITING SHOWS NO DEFINITIVE SIGNS OF ADJUSTMENT TO SLOWER RENT GROWTH
» LOW-COST DEBT AND LENDER COMPETITION EXERTING PRESSURE ON ASSET PRICES
The cost of financing apartment acquisitions and refinancing maturing apartment loans held to record-lows in the first quarter, exerting upward pressure on asset values. Across new mortgages made by banks, life companies, CMBS conduit originators, and through the sector-dominant agencies, average interest rates for fixed-rate financing generally ranged between 3 and 4 percent, depending on asset quality and location. For long-term amortizing fixed-rate debt, the average interest rate on new originations was 4.0 percent. Spreads narrowed during the quarter, reflecting a marginal increase in the underlying Treasury yield.
Apart from historically low capital costs, the apartment financing environment reflects increasing competition amongst lenders to fund deals. Tier 1 markets and several Tier 2 markets showed an increase in new entrants in the first quarter, including established lenders expanding from adjacent metro areas. Debt yields, the ratio of property net operating income to origination loan balance, slipped below 9.0 percent during the quarter. For loans with balances above $10 million, the average debt yield was 8.4 percent. Across all properties, borrowers were able to raise $11.26 in debt for every dollar of current income.
The broad pattern of weaker underwriting and greater risk-taking described in the Special Report on Apartment Lending and Credit Risk was unchanged in the first quarter. Lenders' favorable assessment of current apartment market conditions contrasts with increasing exit risks from higher interest rates and a growing share of loans with initial interest-only periods.
Investors in Manhattan apartment buildings have the best access to financing of any primary market, followed by Seattle, Los Angeles, Boston, and San Francisco. Measured in terms of loan structure, debt yield spreads, and underwriting cap rate spreads, Miami rounded out the top ten list for the first quarter. Chicago and Atlanta underperformed other primary markets. Their relatively weaker occupancy and rent trends are partially reflected in more conservative underwriting.
Competition to lend in the most actively traded markets pushed underwritten cap rates to below 5.5 percent in six metro areas, including Washington DC and the Beltway. As compared to the other gateways, Washington is relying more heavily on capital markets than fundamentals for recent gains in market values.
About the Reports Chandan Economics' quarterly lending trends reports leverage data on mortgages originated across capital sources — by banks, life companies, agency lenders, and conduit lenders. The national report is generally published four weeks following the end of the calendar quarter. Metro-level reports are published the following week. Visit « Debt & Credit Analytics » / « Debt Trends » on the Chandan Economics client site, or contact us for information about subscribing to Chandan's research services.
May 2013 Debt Markets Briefing
Quarterly Lending Trends and Credit Risk Outlook • May 21 2013 • Registration Now Open